Home Bancshares, Inc. (HOMB) Q4 2023 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. Fourth Quarter 2023 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. [Operator Instructions] The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2023. [Operator Instructions] This conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.

Thank you. Good afternoon, and welcome to our fourth quarter conference call. With me for today's discussion is our Chairman, John Allison; Tracy French, President and CEO of Centennial Bank; Stephen Tipton, Chief Operating Officer; Kevin Hester, Chief Lending Officer; Brian Davis, our Chief Financial Officer; Chris Poulton, President of CCFG; and John Marshall, President of Shore Premier Finance. Our team is assembled today to review the fourth quarter results with you, and we will begin with some remarks from our Chairman, John Allison.

Good afternoon. Welcome, everyone, to the fourth quarter and year-end 2023 earnings release and conference call. I firstly want to thank you guys for your many years of support that you've given this company. I believe Donna told me the other day how quick time passes. This is our 25th year. Donna, is that correct?

That is correct.

25th year. It's hard to believe that Home Bancshares has been around for that length of time. I finally remember 1999, it was our first year in business. And we were cash flow positive and would have been profitable had we not started building reserves at that time. But you know our belief on reserves, and we continue to build them over the years and they paid dividends for us. Year two, the company was profitable and has been every year since the first year. We ended 2023 with total assets of $22.7 billion and earnings of almost $400 million. And actually, we would have earned over $402 million without the surprise FDIC $13 million special assessment that we had to book for our part of the failed banks that occurred during 2023 because of poor management of some of those respective banks. I've heard for years Washington complain about taxpayers bailing out banks that went broke. In '08, '09 and '10, it was TARP, Troubled Asset Relief Program and the Fed was heavily criticized for that program. We borrowed $50 million from the Fed at a little over 5% interest. I think during that time, we were getting like a 0.4 I don't remember how much, Brian, were we getting on that money, but maybe a point and we were paying 5%?

Yes, we weren't getting much on it.

Weren't getting much. Anyway, I think the Fed did our math, I think they made money. We did that totally as an insurance policy and never spent a dime of the money. If you remember what I said when someone asked me, what did you do with the money? I said, I took it Home, put it on my fella and waited 357 Magnum right beside. I said it seems like it was yesterday when that happened. We kept the money for several years while becoming the largest buyer of failed banks in the U.S., or at least one of the largest buyers of failed banks in the U.S. We were building out our Florida franchise that has become a very profitable part of this corporation, what a great run that's been. I don't know about other banks paying their fair share, but we certainly did then, and we are now. We are having to pay $13 million because of the stupidity of other management teams. I don't like that, but it is the best way for banks to repay the Fed. After all, the Fed did front the money to save many, many, many banks. I think the prior years would have been enormous. I felt the system was on the edge of collapse and the Fed had stepped in with their new BTFP, bank term lending program. Under this program, the Fed allows banks to borrow 100% of the face value of any security regardless of the market value. So if they had a municipal that they paid $100 for and the market value was $50, I think if I'm correct, Brian, I can borrow $100, right?

That's correct.

So those that had the major ALCI problems this kind of wipe that out for a lot of them. Probably that saved 80% of the banks in the U.S. Bank management teams ploughed all that funny money, fiat currency, into long-term low-rate securities, while in a raising rate environment. It's almost funny if it wasn't so serious, and you can't make this stuff up. That's why I say most bankers are not very smart. The small percentage of banks that did not make that mistake have weathered the storm well. Home was prepared for failed bank days in '08, '09, '10, '11, and reaped the dividends of the war chest of capital in huge reserves and strong management team. Likewise, this time, Home was totally prepared for this bank crisis. We didn't know when it was coming, but we were just getting prepared with more capital, larger reserves, more experienced management team and a fortress balance sheet. But the monsters were just too big and many, many banks would have failed. If the Fed did not provide the easy access to cash, the regulators moved to provide free money. Once again, probably was the best thing that Fed could have done to save the weak banks. Home was hoping for another [indiscernible], and again, was one of the few in the country that properly prepared for whatever was coming. Our regulators have continually told us to keep our powder dry because they're going to need us to help clean up some of these messes. There are simply too many weak banks clearing up the bank space with limited capital, crazy growth plans, coupled with very weak leadership. Kemmons Wilson, the Founder of Holiday Inn said, good judgment comes from experience and experience comes from bad judgment, and I think there is no substitute for experience. These banks with 8% or less capital, 75% to 80% efficiency ratio and loan-to-deposits of 105% threaten the entire safety of the whole bank space. The regulators were stretched to the hill. I think it's just too big a job to regulate that many different financial institutions. If my numbers are right, there are nearly 5,700 banks and another 5,400 credit unions. And with credit unions, buying banks all over the country. By the way, as you know, credit union pay no state income tax and no federal income tax. So every time you see a credit union buying a bank, the federal deficit goes up. That needs to be corrected. Let's talk about the results of the quarter and the year. They were pretty good. We'll take the blame for poor results that we can't control. But the Fed assessment was almost $10 million after tax, totally beyond our control. So I want to present with you today both why and how we reported the earnings under GAAP, and how they look had we not had the assessment. Different from the past, we'd have -- the Fed would just tell us to pay so much a quarter -- we had to actually book the liability this time, right, Brian?

That's correct. We booked the whole $13 million.

We booked the whole $13 million, which ended up about $9.6 million after taxes, if I recall. It is our belief a matching amount of -- we're not going to get into the lawsuit deal today because that's in court. And I think that probably cost us some money for the quarter as we continue dealing with that over a period of time, but that decision of how much money that is will be determined by a court of law at some point in time. And it was $9,739,000 after tax was the assessment. So we reported earnings of $86.2 million. Without the Fed charge, we would have had $95.9 million, almost $96 million. So for the year that put us at $392,929,000, or without that, we would have been at $402,698,000. So the EPS was $0.43, and without the Fed there, would have been a nickel, $0.05 a share, so it would have taken us to $0.48, and that is a beat. Return on assets were $1.55 with the Fed cost and $1.73 without. And year-to-date, we're around a $1.81 without. Return on tangible common equity was 15.8% with the Fed assessment and 17.54% after. P5NR was 48.22%. We haven't been that low in a while. That's with the assessment in 53.51% without. Steve is going to talk more about it in a little bit about the margin. The margin was 4.17% versus 4.19%, and a little of that we created ourselves I think, Brian, with our borrowing, didn't we, that 1 basis point for the month. So actually, we're pretty much flat. Non-performing assets remained stable at [ 0.42 ], both in the third and the fourth quarter, and we continue to maintain our reserve of 2%. Tangible book value because our ALCI and earnings kicked up pretty good from $10.90 in the third quarter to $11.63 in the fourth quarter. So CET1 continues to grow. We were at 14% last quarter. And this quarter, we're at 14.4%. We're making good money, and we continue to grow those capital ratios. Leverage was 12.4% and risk-backed assets was 18.1%. Revenue was a beat. Fourth quarter revenue was $245.6 million. So I thought that was pretty good. It's interesting watching that we were up pretty strong on interest income, but we're up almost likewise on interest expense. I like the spread. We were up $11 million plus on interest income, and we're up $11 million plus of interest expense. So hopefully, that's going to stop or slow down at some point in time in the future. Loans grew by $152 million in the fourth quarter. CCFG, they were down $61.5 million for the quarter, but legacy grew a total of $214.4 million were the best quarters we've had in a while. Deposits also grew by $270 million. In Q4, we repurchased 815,000 shares at an average price of $21 for $17.3 million. And for the full year of '23, we bought back 2,225,849 shares at an average price of $21.69 for a total buyback of $48.3 million. We have 16.7 million shares left available for repurchase. It was not a great quarter, but it was not a terrible quarter. I'm sure a lot of people got bigger problems than Homes got. It just was a tough quarter, very frustrating and difficult quarter. We embarked on a, as I told you last quarter, a cost-cutting measure. I don't know where we are there yet. I haven't seen any of it, but I think we should start seeing it. I mean should show up first, should be in this month, next month and the month after that. So if we didn't get enough, we'll go back and get some more, but it's a tough environment. Outside of that, Donna, I don't really have anything. You can have it back and do what you want to do with it.

Okay. Thank you, Johnny. Next, we will hear from Stephen Tipton with some operational details.

Thanks, Donna. I'll start with the net interest margin, as Johnny referenced in his comments. The reported NIM was down 2 basis points to 4.17% in Q4. But as mentioned, we carried some additional cash on the balance sheet late in the quarter, which improved NII but negatively impacted the NIM by 1 basis point for the quarter. We continue to closely monitor asset repricing against the increase in cost on the funding side. When adjusting for the excess cash in December, the monthly net interest margin would have calculated at 4.17%, nearly matching the quarterly average. During the quarter, total deposit costs increased 22 basis points to 2.09%, while the yield on loans, excluding event income, increased 20 basis points to 7.19%. On a monthly basis, total deposit cost increased 6 basis points in December to end the year at 2.16%, while the yield on loans, excluding event income, increased 4 basis points to 7.25%. Switching to liquidity and funding. It was great to see an increase in deposits in Q4, particularly as the rate backdrop continues to be extremely competitive. Total deposits increased $269 million in the quarter, with the majority coming from the Texas and Arkansas regions. The deposit mix movement was similar to prior quarters as interest-bearing balances increased and CDs continue to be in focus for the consumer. We still remain just under 10% of total deposit balances in that CD category. Noninterest-bearing balances account for 24.3% of total deposits, down to 26% in Q3. Alternative funding sources remain extremely strong with broker deposits still only comprising 2.3% of total liabilities. And the loan deposit ratio was in line with prior quarter standing at 85.9% at year-end. The focus on loan committees and discussions amongst all of our presidents continues to be on deposit gathering, core customer growth and retention. On the asset side, as Johnny mentioned, in-period loan balances increased $153 million with the Texas region increasing $160 million and Florida increasing $31 million, offset by a decline in the balances with CCFG. On loan originations, the volume picked up in Q4 with approximately $1.17 billion in commitments. CTFG finished the year strong with nearly half of their full year production coming in Q4. The community bank groups accounted for 2/3 of the loan production in Q4, with the Texas regions closing nearly $400 million in volume. Overall, yield on originations continues to improve with an average coupon of 9.18% in Q4. Closing with the previously mentioned strength of our company, all capital ratios improved in the quarter, notably with a tangible common equity ratio of 11.05%, a leverage ratio of 12.4% and a total risk-based capital ratio of 17.8%. With that, Donna, I'll turn it back to you.

Thank you, Stephen. And now Kevin Hester will provide us with the lending update.

Thanks, Donna, and good afternoon, everyone. I'm happy to be able to tie bow on the very challenging year of 2023 and begin to look forward to the new year. Even with the unprecedented challenges that we faced as an industry in 2023, we, at Home, were in a very good position to take advantage of whatever this year brings. Our asset quality remains solid with low past dues and nonperforming loans, combined with a very strong capital position, which includes the 2% loan loss reserve. I will provide details on that in a moment. First, I would like to give you an update on the 3 credits that we discussed in detail last quarter. We have agreed in principle on the sale of the Oklahoma Marina note at par and hope to have it closed very soon. We are finalizing the note sale documents at this time and would anticipate payoff to occur shortly afterwards. We also have a signed offer with a short due diligence period on the Miami property at a number that would result in a full payoff of the OREO balance with a small recovery. This buyer is familiar with the property and the area, so we think is a good buyer for this asset. Regarding the third asset, which is the office property in California, I will pass it to Chris Poulton for an update.

So the subject property is a 95,000-square foot office building, subject to a ground lease located at 1733 Ocean Avenue in Santa Monica, California. During the quarter, we completed a deed in lieu of foreclosure in October. During the fourth quarter, we expensed just over $300,000 in transaction costs to bring the property into OREO. As part of that transaction, we received just over $5 million from our borrower and this was used to reduce our basis in the property to just under $23 million. The current as is the appraised value is just over $32 million, putting our carrying value at approximately 70% LTV. Building is currently 50% occupied, operates just above breakeven, where our lease income is at or just above our buildings expenses, which includes ground lease tax insurance and other operating costs. We're planning to occupy space in the building. We started moving our West Coast office into the building this week. Our prior lease in L.A. expires this month. Our media focus on the building is in 3 areas: first, stabilizing the rental income through extensions and new leases; second, there's some cleanup remaining on the existing ground lease; and then third, we're preparing to market the property for sale. Bad news is that this is an office building. The good news that it's very well located. We've been paid down by 50% against our original loan. We have an immediate use for a portion of the space, and the current building income is sufficient to operate at a breakeven today. With that, I'll turn it back to you, Kevin.

Thanks, Chris. Going back to the asset quality numbers. Nonperforming assets remain unchanged on a linked-quarter basis at 42 basis points. Early-stage past dues at 12/31/23 were 61 basis points, which is down 23 basis points on a linked-quarter basis and flat when compared to a year ago. Net charge-offs for the year of 2023 were 9 basis points of average total loans. As a further note, we have completed a detailed review of all 2024 maturing loans over $3 million with an interest rate below 7% and have noted very few loans for which an increase to current interest rates would create any significant default concerns. This is due to a combination of strong borrower guarantor support, low overall leverage and the majority of our lending taking place in growing Southern U.S. geographies. We will continue to monitor this subset of loans but are encouraged with what we see at this time. In conclusion, I'd like to thank our lending staff across the footprint for doing the hard things, asking to be paid for the risks that we take and pushing for the equity and structure needed to make sure that the borrowers' interests are aligned with ours. It's not easy work, but it's the difference between an average performing bank and a best-in-class financial institution. Donna, that's all I have, and I'll turn it back to you.

Thank you, Kevin. Johnny, before we go to Q&A, do you have any additional comments?

Tracy, any comments today?

Well, first of all, congratulations on the 25 years. I could have sworn it's long as I thought I'd work with you for 40. But congratulations on that, Mr. Allison, and hell of a story you've created. Good reports. It's nice to see '23 close the books on it. It was an interesting year. Last quarter seemed to show the turn in the loans and deposits. And as you've indicated, our noninterest income, noninterest expense, I think there's certainly room for improvement there, and we'll continue to do that. But just also complement the entire management team of the bank all across this company of all the things that they've done to get us through this year and look forward to 2024, I think. Johnny?

The margins, been able to maintain that margin to me, Stephen, it's pretty important right now. And it looks like -- I think we've got -- they asked Donna just on the road when we were out for the last, I'm sure next time, you think you can maintain that margin. And I told them I thought we could. We certainly intended to try to. So what do you think?

Yes, I think certainly on a monthly basis over the last quarter or two, I mean, we've operated in a pretty tight range. We still have the maturing loans that we've previously talked about that will continue to come through over the course of '24. And if we continue to be able to reprice those upwards, I think the prospects of that are good. It's certainly what we're working for.

So Kevin, are you seeing the pipeline remaining fairly strong here or are you seeing it getting short, the pipeline easing up a little bit?

No, I think it depends on the geography, but we certainly have some folks that have some good opportunities in some good areas. So it looks like first quarter is holding in there, and I feel pretty good about '24.

Brian, have you completed your budget for '24?

Well, yeah. We're going to have it presented for the Board meeting this week.

And how much did you raise? Did you lower or raise? What do you do?

Well, it's down a little bit.

Better than expectations?

Yeah.

We've challenged it to be better than what expectations are out there. They asked Donna and I, they said, we got your forecasted to be down next year. And I said, what do you think about that? I said, I don't think about that. That's not how I think. I don't think that we're going to be down. I think we've got a shot. There might be some opportunities out there. You saw where Home Street sold today or yesterday. We see some activity out there, maybe some opportunities for us out there at some point in time that we can pick up. We haven't really addressed much M&A in the last couple of months when we got on the deal out in Texas at one point in time and that what [ arranged ] for us, and we really hadn't -- I can't think -- we haven't looked at anything lately, have we? Donna had her head down running her own business and trying to get to year end. So anyway, I think, Donna, I'm going to turn it back to you, and I'm ready. If everybody is ready for Q&A, we'll go to Q&A.

We're ready for questions.

[Operator Instructions] Our first question comes from the line of Brett Rabatin with Hovde Group.

Congrats, Johnny, on 25 years. It's been a run.

Yes. That's correct. I didn't realize it's been 25.

Wanted to first talk about the margin a little more. You talked about being able to maintain it, can you talk maybe about the dynamic with NII and the margin? And it would seem like you might manage the balance sheet fairly flat or have an opportunity to. And while you're growing loans, which could mean the margin is better later this year, and so I just wanted to get an outlook for the margin. If the Fed does cut rates, how do you feel about that? Could the margin trend up later this year?

Brett, this is Stephen. I think our view today is while we continue in this rate environment that we're in, that we're able to kind of tread where we are, like we said, we've traded in a pretty tight range here over the last couple of quarters. We do have the opportunity from a loan repricing standpoint. I think we talked last year, we had $1 billion over the next 5 quarters. I show we have about $780 million that is under 6% that will mature this year and give us the opportunity to reprice. We've got a little over $1 billion that's at or below kind of our spot rate at the end of December, which was 7.25% on the loan book. So we still have some upward pressure on the deposit side. That seems to maybe have slowed a little bit. We had a lesser increase in December than we've seen on a monthly basis in the back half of the year. So I think our view is that the ability to reprice loans can offset what we continue to have to do on the deposit side in this rate environment that we're in. I think our view is if we do see some cuts at some point in '24, that gives us the opportunity to pair back on the deposit side what we've done. We've got $11 billion in interest-bearing checking and a really short CD book. I'm looking here, our total CD book is about $1.6 billion. And I think 80-plus percent of that matures in 2024. So even as some of these come through, we may be able to fine-tune some of that if we see some rate cuts actually materialize.

We watch it every day, and we look at it every day. We look at what the revenue is generated for that day and basically what the margin is for that day. So I mean, we live it 24/7 around here. So I actually don't think there's not as much room -- I don't think interest expense is going to go up as much as interest, revenue is going to go up. So as you heard from Stephen, we've got some repricing opportunities coming out about $1 billion for us. So I think we'll continue to do that. We'll monitor it on a daily basis as we have been doing. As you can see, we basically won a little bit in the fourth quarter. The third quarter, we were getting beat. The interest expense was out running the revenue and was disappointing, and we made some adjustments there. So in my last call, I said only two ways to increase profitability, and that's to cut expenses or increase revenue. And we did both, but you haven't seen the cost cut effects of the company yet to my knowledge. I appreciate the compliments about good expense control, but it's not where we wanted it to be. We just got a little fat over the years, and it happens. It's just natural to do that, and we went back in and we went to work on it. And if we didn't get enough, we'll go back and get some more. So we're committed to the cost save side at this point in time, and we're committed to the revenue side. So we'll continue to monitor on a daily basis. But deposit cost, I think -- I don't know if they trough, but they've certainly gotten to a point. We're still seeing these 5% to 6% CD adds run by these banks that are out of money, completely out of money. A person would certainly want to be careful about putting money in one of those banks running those kind of ads because what that essentially says is we borrowed all of the money, we can borrow it, and you can borrow it from the Fed, a lot less than that. And to hell with profitability, we're going to try to save the company somehow. So you'll see us -- I suspect, I would have really thought that our margin would have been up. We did a little borrowing, and we've borrowed about $500 million from --

BTFP program. We borrowed an extra $500 million.

Borrowed an extra $500 million, and we're getting a spread on it of about 45 basis points.

It's actually up to 64 basis points today.

64 basis points. So anyway, I don't know how I feel about doing that, we borrowed it and then put the money there with the Fed. I don't know how I feel about that, but that wasn't what the intention of the program was for. The intention the program was to save these banks that are broke, and they did that work, and it saved them. Well, we were in that deal. I thought we ought to get something out of this deal, so we're getting a little spread on that. So that lowered our margin for the month by a basis point for the quarter, 1 basis point, or we would have been within 1 basis point of that. And the third quarter had a little juice in it that the fourth quarter didn't. So actually, margin was flat, and I'm pretty proud of that during the quarter. So we'll continue to monitor that. So it's a long-winded answer, but there's a lot entailed in this company to managingthe margin.

If we have the $500 million for the whole quarter, we'll be -- that itself will be profitable to the bank, but it will be dilutive to the margin about 10 basis points.

Yes, if we keep it all next quarter, it will be dilutive to the margin by 10%, but it will increase profitability by about $1 million for the quarter.

That's helpful. I was going to ask about that. It looked like that was what that increase in borrowing was. And back just on my other question, my follow-up question was just around loan growth. And it sounds like the pipeline suggests you could continue to have some growth. Last year, you kind of managed a flattish growth. If we were to pencil it in mid-single digit for the year, would that seem fair to you guys or with a different number be more appropriate?

Brett, this is Kevin. So I think we gained some traction last quarter in production. I feel good that that's still continuing in at least in some of our markets. I think the question is going to be really payoffs, and that's even more as we get into the middle of the year. So I think probably low single digits is something that I can get on a little bit more than mid, but a lot of that will depend on, I think, payoffs.

We're seeing payoff slow somewhat in different markets because they can't get it financed. We're blessed with the fact that we didn't make the stakes that 95% of banks did, and we have money to loan. So we're in a position to loan money. As a result of that, that's where you saw the loan growth come in in the quarter was because the fact we had money to loan and not many banks in the country had money to loan. So the founders came to us, and we made some good relationships, hopefully, relationship loans that will be with us for a long time. There's a lot of loan business out there because there's not many people loaning. I mean, we could roll into a recession pretty quick here because these banks that are at 105%, 108% loan-to-deposit can't loan any money. They'll just shut down.

The next question comes from the line of Jon Arfstrom with RBC.

Congrats on the 25 years, Jon.

Yes, I've only covered you for 16 years. So, I still have training wheels on. Can you talk a little bit more about the expense expectations? You keep hinting at it a little bit but it didn't show up in the first quarter or it didn't show up in the fourth quarter. What can we expect? I know Brian Davis, you touched on it a little bit as well, but what's coming?

Jon, there were some reduction with staff done this fourth quarter, and most of that happened in November and December. So some of that will show up starting now. But every market -- and we've talked to every region and every manager that's support office type stuff, and it's just making sure we're fine-tuning everything. So there's still room to improve. We always want to do that and always have been able to do that. So I think there will be more, but more of the first quarter should kick in a little bit.

I had told Tracy, I said, can you get the cost down and he said, yes, I'm going to get them down. I said, well, get them down because I got [indiscernible] warming up on the sidelines. And she was efficiency girl. If you can't get it down, I'm sending her in the game. He didn't think I was very funny. In Texas, there were some things that were [indiscernible] and Scott Lewis and the team out there pick the ball up and run extremely well. So I think you'll certainly see some of that effect in the first quarter and some of that will actually close a branch or four. And so that happened in the first quarter, so we may not see some of that till the second quarter. But he's fine-tuning everything. All the managers out there picking the ball up and doing their jobs. We didn't get the savings out of Happy that we expected. We just didn't get them. And now this management team is working on getting those expense cuts. We'll see that, we'll feel that, I think, in the second quarter. So some in the first quarter, but some of the branches we're closing will be second quarter events. So the number is $25 million to $50 million, $25 million to $50 million. That's the number. I didn't say that. Jon, you've got expenses going up. I mean our group insurance went up a couple of million dollars. You just got everything going up, everything is going up. So to say that you're going to reduce expenses in '24, if you can hold the expenses in '24 with all of these things that are beyond our control would be great.

Yes. Okay. Okay. Fair enough. I just wanted to ask a question on credit. You kind of dominated the call last quarter and you were pretty quiet on it this time around. But anything new on credit, any new or emerging concerns we should be aware of? And then for Chris, just anything on the potential timeline for resolving the California office property.

Jon, it's Kevin. I'll take the first one. Nothing of any significance at this point. We're working through those three we talked about. And as I said, we've looked at what's maturing that's at low rates, and don't really see any significant issues there. Past dues, they're flat from last year below where they were a quarter ago. So I think that's why you saw that there was less emphasis on it this quarter, and it was more of a focus last quarter.

Chris, you can take that now.

Hey, Jon. I would say we're going to be pretty patient on this one. It's an office building, and it's a tough market for office. I could liquidate it, but I don't think that's the best result for our shareholders here. It's breakeven. I can use it, have a need for it. And I think if we put a little elbow grease into this and stabilize it, we drive a higher value for it. So my point of view is that I think we can enhance the value of this. I think that this was not well managed by the previous borrower once they realized they weren't going to be able to recoup their money, and it took us a little time to get control of it. Now that we have, I think, we should do some work on it. We're doing some work on leasing, et cetera. Let's get that done and put it in a good position for a buyer. We're not the right long-term owner of it, but I think we might be the right short-term owner.

Jon, I've been quiet because we've sold two of the three out of them. So hopefully, they close [indiscernible]. And we losing money on them. So we want to roll them right in the first place. Thank goodness the team -- Kevin, Brian and the team has really done a good job. They did a good job underwriting. In times like this, a lot of people do 80/20 lending, you put 20% in and they loan you 80%. And that kind of becomes a rule. But in times like this, you've got no equity because the values of some of those properties have deteriorated and there's no value in them. So the good tough underwriting at Home that's maintained over the years is certainly paying off for us. And there may be some hiccups in the field, some people may have some hiccups, but I don't think there's going to be substantial hiccups. It's not a '05, '06 or '07 when we made that tour through the Florida Keys. It's not one of those deals. So it feels different now because most of the stuff we've got, we're at a loan-to-value of 65%, 70%. So instead of having no money or a little money in the deal, we got 25%, 30%, 40% deals. So I think it will be -- I think we'll have some, but not a lot. So reason I was quiet because I'm pretty happy on the fact that we had 3 pieces of property that concern me and we've sold 2 of the 3.

Our next question comes from the line of Brady Gailey with KBW.

I wanted to start with your sensitivity to interest rates. I mean, the forward curve suggests a decent amount of rate cuts this year. If that plays out, will there be much of an impact to your net interest margin? I feel like you guys tend to be somewhat rate neutral, but what's the impact to the margin if we do see rate cuts?

Brady, this is Stephen. We're looking at our ALCO model assumptions now. I mean to your point, I think we've been plus or minus 5% on both sides up or down in the past. I mean, as I said to Brett kind of at the outset of the call, I mean, I think our view today is that in a down rate environment, if we see short-term rates come down this year, we'll be able to kind of attack the interest-bearing checking side of things and see a little margin improvement. I think our budget, if I remember right, has four rate cuts potentially in it next year and show some margin improvement throughout the year. I don't know what the model chose today. I think as we work through our assumptions, that's our belief in terms of being able to improve in a down rate scenario.

Brady, if we have six rate cuts this year, we're going to be in a lots of trouble. I hope that's not correct because -- I hope it's not politically motivated behind it. But if we have six rate cuts, it's a sign that we're in trouble. So I don't -- the country is in trouble, not Home. The country is in trouble. So that is pretty scary to think that we could have six rate cuts. And I understand the pricing of 6 rate cuts in. I'm still hire-for-longer guy. I just believe that we may see 25 basis points or 50 basis points wouldn't hurt us. But if we four major rate or six rate cuts, we got big problems. And it reminds me of the late '70s when Volcker pivoted because of pressure, and we had to come back at 21% rates in the early '80s to kill a snake. So I think a long -- I think it's going to be, hopefully -- we don't end up in recession.

Yes, I agree with it. KBW only has, I think, two cuts in our economic baseline, obviously, I agree with you. My last question is just on bank M&A. Johnny, I know you've been very active in that over the years. Do you see traditional bank M&A, unassisted bank M&A, do you see that dethawing at all any time near term?

Dethawing?

Yeah, like becoming more active.

Yes. We talk about it around here. It's just the expectations of the sellers and the cost of the deals and the marks. We saw where HomeStreet got bought. That's probably a pretty good trade. There may be some trades like that out there that make some sense that really bank need to be in stronger hands. But outside of that, I'm afraid M&A -- you know me, I like to do M&A trades, and we've done a lot of them. I'm just afraid we can't get them done. I'm just afraid they won't work. We haven't been involved -- nobody has been involved in M&A really around here lately because it's just been -- we've been trying to wrap the year up and do what we're doing, get the year -- we want our $400 million, and Brian Davis told me we won't have to book our exposure to the Fed deal, but that's okay. I mean, we would have made -- we would have done it without it. So I don't know if I've answered your question or not, but that's about as good as I can do.

The next question comes from the line of Matt Olney with Stephens.

Johnny, you mentioned the market expectations for Home Banc was for net income to be down in '24 versus '23. It sounds like you don't agree with this. So I'm just curious if you want to -- give you a chance, talk about your targets for '24, what's the Johnny made for Home Banc in '24?

It's certainly not a down scenario. I've never budgeted a down scenario in my life. So they're not -- if they're going to -- I think it's going to the Board for approval, I'm going to vote against it. When you think about taking advantage of this opportunity when all these banks are broke in the country and can't loan any money, it will all be a great time for us. I mean, we had revenue was strong. We had growth in revenue, growth -- with high interest times, we had growth in revenue, growth in deposits, loans and margins hanging in really good, asset quality is wonderful, and we've got lots and lots of capital. And one of the few banks in the country, they can pay out all uninsured depositors. So I like where we're sitting. I like where we're buying shares are sitting. We have built this, isn't by accident, we've built it this way. So it is one of the strongest banks in America. We'll get our fair share, but I'm north of $400 million without a settlement on the West Texas deal that bothered us, I'm north of $420 million. That's where I want to be. That's a Johnny number.

Okay. Okay. Well, I appreciate that and wouldn't be surprised if you guys to ultimately get there this year. What about on the loan growth front? I think you guys mentioned a while back you were looking at doing an energy loan. I didn't know if you got that deal done and funded or that's still on the drawing board?

We did it. It's done. It's on the books. It's on the books, going well. On the books, going well. So we got an opportunity on another energy loan. We're not afraid of energy loans. I think you've seen the guys in TV trying running electric cars down the road, something tells me oil and gas going to be here for a long time because I'd say Hertz is selling like 25,000 electric cars or something, taking a beating on to get rid of them. I believe oil and gas is going to be here for a while. So we're not afraid oil and gas, we would do more oil and gas.

Yes. Okay. And then, just lastly, I think Kevin mentioned in his prepared remarks that you did -- I think it was a deep dive in some of the CRE properties that will be reset higher than the loan pricing. I think you mentioned this in the prepared remarks, but I missed this. Was this any specific segment or any region or just more a broad deep dive?

Matt, this is Kevin. So it was all loans that are maturing in '24, over $3 million and had an interest rate less than I think it was 7%. So just really across the board, just trying to get ahead of anything that's going to have a pretty big rate shock and make sure that we understand what that looks like and that there's not any issues. If there's going to be an issue, we want to know it now rather than in the third quarter when it matures. So in that review, there was just a handful of things that -- and none of any great size that looked like it could be even a challenge to the project. And the good news is that almost everything we saw had either a really, really strong gear towards the lot of liquidity or a lot of very, very low leverage, those sorts of things. So again, Johnny is talking about the underwriting that we feel like that we've done well over the past several years. I think that's where this comes into play as when you're looking at a several hundred basis point increase in rates and still everything looking like it's going to work out.

I didn't know he was doing that, and he did it. I think it's Greg. He called me and just said, hey, I just went through everything $3 million less, it matures in the next 12 months that is 7% or less. And he said, Johnny, I didn't find hardly anything, which gave me real comfort. So I appreciate them doing that. Appreciate doing that, makes me feel good. And it should make you feel good, Matt, representing us to investors.

The next question comes from the line of Stephen Scouten with Piper Sandler.

I'm a little scared to know what a good year looks like if this is supposed to be a bad year, Johnny. Would you put 1.8% ROA, 17% ROTCE. I got scared when I read the first line of the press release, and then I looked at the numbers. So seems a good result.

We ranked -- Donna just did the quarter, last quarter, and I think we ranked in the top 3, 4 or 5 of every category, ROA, ROE. So we're getting this kind of performance. And I said, we don't care, we don't pay attention to other people's performance. It's what we're going to do. We're going to do better than anybody. We want to be better than everyone. So we're getting good performance. The numbers looked good. But I appreciate that comment. You'll make him and Stephen and Tracy and Brian, all want to just take a nap or go on vacations.

So the area I'm most interested in is really the strong loan growth you guys had. I mean, so far this quarter, we haven't seen much in the way of loan growth from a lot of peers and a lot of the industry as a whole. So 4.3%, I mean, may not feel like a lot, but on a relative basis, it looks like a ton. And so I'm just wondering if you think that's sustainable maybe going back to Brett's question earlier on. And then if there's any kind of geographic dispersion or any segments or kind of any additional color, Kevin, you might be able to land this where that's coming from and how you're getting it.

This is Kevin. So geographically, certainly, you got Texas and Florida who are poised to provide that because you got so many people still moving to those two geographies and particularly the Southern Florida part. So that's always helpful. Do I think it can continue? It certainly can. Do I think it's -- Johnny mentioned it earlier, I think you've got a lot of banks who have pulled back and either by choice or because they don't have any liquidity and the ability to loan. So that bodes well. We're still going to -- we're still having to fight the rate issue because some deals just don't work at these rates where you have to have so much equity that it is a challenge to get people to put that much in. So that's still a challenge, but there's -- from a competitive standpoint, we have a little bit of a break here it feels like in the ability to do that. So to the degree that we can still get what we want to get from a yield standpoint and get the leverage points we want, there are opportunities. That's what we're working into.

Stephen, if I could add, I mean, a lot of it is the referrals that we're getting. I used an example, Johnny has a customer, a great customer that he got introduced to someone when he was down here visiting with his customer. That's turned into several opportunities for us. In Texas, we've made some relationships that getting customers, calling referring us to help them on opportunities, and we're seeing that in Arkansas too. Some of the banks that have changed or done something different in our Northeast Arkansas, they're getting opportunities to look at. Will we do them all? We don't know. But we're just -- it's coming back to just good old fashion referrals that we're getting from other -- just keeping our hand shaking and saying hello.

That's exactly right. It's kind of referral to referral to referral and it's -- we just had a guy came in aces, traces and flushes, his bank's in trouble his banks in trouble as 95% of them are. His bank's in trouble and sometimes you want to do the right thing and you just keep building your company, dotting your Is and crossing your Ts and when you see a crisis like we've seen, you know you're doing the right thing and people are coming across the country to come see you to do transactions with you, because you have a good reputation because you got the money. And the guy looked to me and said what's the cost? I said it's 10% plus a point. And he said, I figured that's what he's going to say. And that's what it was. That's what the price of the deal was, 10% plus a point. So we have that opportunity right now. Hopefully, we'll be able to continue to -- we're not going to do everything at 10% plus. We have the opportunity to do some of those transactions, I think, at some reasonable rate in the future. So one of our big customers company-wide was in Florida at his resort, and had me come down and meet this guy. And I opened with Kevin and his referral deal and it was a great credit, great guy, $50 million credit. We did it. Just one led to another and another. He said, "Guys, I'm having problem getting this done. He said, "You need to talk to my banker." So anyway, because we got the availability of money, because we got the strength to do it, that's why you're seeing the loan growth.

Yes, that's great. And you mentioned that 10% plus a point. I mean, what sort of yield on average -- I don't know if you have that number, but average new loan yields in the quarter, what's kind of -- what you're seeing? And how much pushback is there from customers on those yields, whether it's renewals or new customers?

Stephen, it's Stephen. The coupon on new originations in Q4 was 9.18%, I believe. So as Johnny mentioned, there's a mix of some tens and some primes, right? But largely, we've been able to improve on that, I think, every quarter this year. Kevin may have some color in terms of just pushback.

Well, yes, I mean, obviously, there's pushback because that's part of why I made the comment in the earlier remarks is, I mean, our guys fight that every day, every loan, every situation and try to get all they can out of it. So it's one of the things that we do and just part of working here at Home. I mean you've got to do that, and it's very important. And there's obviously pushback.

Our next question comes from the line of Michael Rose with Raymond James.

Did we lose Michael? He must be too excited. Operator, let's just move on if there's another question, and we'll come back to Michael. See if he's back on there.

Certainly. Our next question will come from the line of Brian Martin with Janney.

Congrats, Johnny, on 25 great years. Just a couple for me. Just on the fee income side, it looks like the last 2 quarters have been a little bit lower, and I think Tracy maybe mentioned that there -- somebody mentioned earlier, I think there's some opportunity for upside. Just kind of wondering where there's some opportunity there or kind of the current level kind of a run rate to think about as you go into next year, or just kind of where the puts and takes could be there?

Yes, we do. We think there's certainly opportunity of improvement. The mortgage business operation has been interesting with the interest rate increases over the year. That's fine tuning, making sure we got the right people in the right place. And Keith that runs that, does a really good job of handling that. So, we think that can probably pick back up and smooth out a little better. We're also trying to figure out. We've analyzed all our accounts. We've done a lot of things to Keith C. There's not a whole lot of room that we can improve on some of the account fee type stuff today. I thought there would be on that, but we're again, as we're just taking a look at every non-interest income, non-interest expense category and identify on what could be out there. But just the way the year was in some of our service industries, I think that -- hopefully that opportunity comes back. If not, we've been very, very fortunate with the Trust business, Kevin Orr and his team have done a really, really good job of joining in with our Texas opportunity and we have the Gold Star Trust out there. It's been a nice pickup and I think that has opportunity to continue to go and grow with the staff that we've got together there. So that's always been a little player in our field in the past, but it's a line item today.

I was just saying I'm pretty pleased with Gold Star Trust and how they progressed. That's a pretty sweet little organization that we -- I gave it no value when we did the transaction because I didn't understand it, but it is -- they do a really good job. I'm pretty pleased with that. We may have him on one of these conference calls sometime, tell you what all he does. I think it'd be good to have him join and explain what he does sometimes.

Yes. Maybe just the equity investments have been down a little bit. So that's another area, I guess I would presume that's more volatile as far as when that lumpy when that would come in.

Yes. I mean, to be honest with you, for this particular quarter, the equity investment income is down about $2.2 million. And when I say that, we've booked about $858,000 in income for Q3. But unfortunately, we had a couple of equity investments that had a decline in their capital balance. And so, we took a loss of $1.3 million, which is sitting in the reduction in our other income line item on the income statement. So it's about $2.2 million swing in Q3 to Q4.

Yes. Okay. And then just on the expenses, I think maybe you said it, Johnny, but not like we should expect a reduction per se on an absolute basis in expenses as you look from 4Q to 1Q given some of the initiatives you've got, but maybe better to think about it for now that it's holding the full year to full year at a stable level is a better way to think about it until you're further along?

This inflation is not over and it's continuing. So, it is -- we're seeing the expense go up. So, if we can cut -- I don't think our expenses going up $25 million. But if we can cut $25 million out, we should get some benefit of that. And if inflation lowers its head, then I think that we'll get some benefits, but if not, we'll have to go back to it again. We got to do what we got to do. We got a responsibility to the shareholders of this corporation to be profitable and they're the ones that own us. We work for them. So we're going to do what we need to do there. Whatever it takes, we'll do. So hopefully, right now, we'll see what comes out the end of the quarter and what the expense reduction is and compare that to the -- you won't see it all because, like I said, insurance, all these different expenses are up for the year, but we'll get a little of it.

Okay. And first quarter should be -- it's typically impacted, it's seasonally a little bit higher anyhow. So it seems as though it's probably the second, third and fourth quarter next would be a little bit lower than 1Q given the timing of these savings and some seasonality in 1Q anyhow. Okay. And then maybe just last on the timing of the borrowing program. Just maybe I missed what you said earlier as far as the timing and the impact to dollars of net interest income and margin, but it was, what, a basis point in the quarter. I mean, I guess, timing-wise, when was the borrowing implemented and just kind of run back through what the timing impact of it was for 4Q?

That was about -- we didn't start until about mid-month of December. Let me start about -- so what you're seeing is about 15 days of the borrowing program, about 15, 16 days. We didn't start -- we talked about it three or four times.

We didn't need it. We didn't have to have that. It's just an opportunity came to the spread.

We missed [indiscernible] Had the Fed not put the borrowing program in, you would have had multitudes of failed banks. And as you know, we were the largest buyer in the country last time, and we would have been this time even bigger buyers because of the strength of our balance sheet and the equity in this corporation. So we missed that opportunity because the Fed came in with free money again, which was probably the right thing to do. That was probably the right thing to do. And then they come back against us, profitable banks, and we pay our fair share. So I think that was -- I think it was the right thing to do over a period of time. We'll see them.

Okay. And the total borrowings on that program that you're getting the spread on, you said spread 64 basis points, how much were the borrowings?

$500 million.

We've got $500 million that we took out in December kind of as a special borrowing. But we already had $200 million outstanding when we did it. We were kind of paying our money back, and we reborrowed trying to keep about $150 million in the check book. And today, we're at $711 million. So that's the whole $700 million and it's 64 basis points.

Okay. And that impacting value would be?

I mean the impact is about $10,000 a day. And I don't know if I feel good about us doing it or bad about us doing it, but we would have been -- if we didn't have this opportunity to do that now, we would have certainly -- they hadn't brought program on, you might see 150 banks out of business today. So probably would see 150 banks out of business today. If they got runs on them, they'd be out of business. I'm going to tell you the big bad wolf will show up, a bunch of the banks around the space would be out of business. So I thought we only get something out of it. So our group own executive committee meeting said, let's borrow some money and I thought, okay, so we're borrowing first at 37 and 42 and 50 and in now 64. So it's a nice little income piece for us. It does hurt the margin. So when you see our margin, if we leave it in the entire quarter next quarter, Brian said it will be about 10 basis points, but it will be more money. So you'll understand you can adjust the margin for 10 basis points into next quarter.

But I guess the real question is, do you want an extra $1 million to have a 10 basis point dilution to your margin?

I mean it's real money.

Right. And do you guys right now expect to keep it? Is that the plan or is that kind of up for debate or the timing on that?

I guess it really depends on what happens with the Fed funds rate. If they drop the Fed funds rate and all of a sudden, we have a 14 basis point spread on the margin, then it probably doesn't look very attractive because we had some opportunities to do that earlier in the quarter, just passed on it.

Got you. Okay. And just remind me, I mean, your outlook or just expectations, I mean, do you expect with this benefit to be able to grow the dollars of NII year-over-year? Is that kind of baked into the outlook here as far as with the sensitivity on the margin and the growth outlook?

Yes. I think that's certainly the goal. I mean we talked about thoughts on loan increase and the outlook there. And if we're able to -- even in this environment, we're able to hold the margin in where it's at, we can see a little balance sheet growth, I think, NII follows.

There are no additional questions in the queue at this time. So I would now like to turn the call back over to Mr. Allison for closing remarks.

Thank you for your time and patience with us. It's been a trying year. Last year was extremely stressful. I think the most stressful year of my banking career when you see banks going broke in 24 hours and all the electronic transfer deposits running out at high rates, and it was actually very stressful for all of us. But Home came through it. You can see how well we came through. You heard Stephen Scouten say what you see one of very good year, it was is a great year. Well, it was -- we set it up for that to happen, and it happened that way. So I appreciate your support. And hopefully, we'll have a good '24, and maybe we'll buy something worth the money to add to what we already have. Thank you very much for your time and your support.

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.